Bitcoin: will the bubble burst?

Will the Bitcoin bubble burst or keep inflating?

Suddenly everyone is an expert on Bitcoin after the cryptocurrency surged past the $10,0000 mark this week, peaking at $11,000 before tumbling down to $9,442 at the time of writing. Not bad for a currency that started the year valued at $1,000.

Amid all the feeding frenzy, there is no shortage of advice by self-appointed experts on this cyberspace gold rush. There are essentially two camps – in the blue corner, we have the conventional market traders who are trash talking this upstart currency; while in the red, we have the Bitcoin traders who are keen to drum up new business.

Bubbles everywhere

The inevitable point of contention is whether the Bitcoin surge is the sign of a new bubble. Most people have heard the stories of the original South Sea Bubble, the Tulip Bulb Craze, the Wall Street Crash, the dotcom crash and so on.

Conventional traders who missed the Bitcoin bandwagon are saying it is indeed a bubble, while the enthusiasts are insisting that this phenomenon is like nothing that has ever happened before.

This author has seen one such enthusiast’s viral post on Facebook insisting that cryptocurrency can’t have the same end result as the Tulip Bulb Craze because it isn’t a flower (well, duh!) and, more specifically, that it’s a revolutionary new technology.

In a Gish gallop of rapid-fire logical fallacies, he went on to say that the world’s first web browser was launched in 1993 and that it would change the world; that in 1997 “they” didn’t foresee that an upstart internet company called Netflix would one day wipe out the mighty Blockbuster video rental chain… you get the picture. “They” didn’t see those things coming, therefore “they” are going to miss out on the wondrous, never-ending bonanza of the blessed blockchain.

The same sort of logic is often used by pseudoscience pushers who say that “they” laughed at Einstein or “they” laughed at the Wright brothers – and that therefore the pseudoscience merchant will one day be vindicated too. Yes, but they also laughed at Bozo the Clown. Being laughed at or ignored doesn’t mean that it will have the same outcome as history’s famous vindications.

It’s all about confidence

Despite being an economics graduate from a Russell Group university, I haven’t a clue how the long-term future of Bitcoin will pan out. If you have money to spare to gamble on the future, go for it, I’m not your Dad. What I will say, however, is that despite all the protestations that Bitcoin is somehow “different”, the commodity value of anything that is traded – whether it’s gold, fiat currency, houses or cryptocurrency – depends heavily on confidence. As long as the confidence is there, happy days. When the confidence isn’t there… oh dear. The latter is especially the case if you put all your eggs in one basket and you spent money you didn’t have in the hope of getting rich quick.

We have been here before. Joe Kennedy, a famous investor in the early 20th century, sold all his shares after a shoeshine boy gave him some stock tips. He figured that when the shoeshine boys have tips, the market is too popular for its own good and it was time to get out.

Another commentator, Bernard Baruch, described the conversations he was hearing before the Wall Street Crash of 1929: “Taxi drivers told you what to buy. The shoeshine boy could give you a summary of the day’s financial news as he worked with rag and polish. An old beggar who regularly patrolled the street in front of my office now gave me tips and, I suppose, spent the money I and others gave him in the market. My cook had a brokerage account and followed the ticker closely. Her paper profits were quickly blown away in the gale of 1929.”

Fast forward to today and Facebook is full of free advice from people urging you to invest in Bitcoin and get on the ladder while you still can.

But, ominously, one broker quoted in Forbes said: “A month before the 1987 crash, my cab driver said he started day trading. A month before the real estate crash in 2007 in Arizona, my cab driver said he was getting into flipping real estate. Last week, my Uber driver said he just started trading Bitcoin.”

You can argue that, being a venture capitalist, he has a vested interest in putting you off Bitcoin. OK, fair enough. It’s your money, you decide. But remember that “free” advice can actually prove very costly.